Canadian retirees are looking for ways to generate better returns from their investments without being pushed into a higher tax bracket while avoiding a clawback on their Old Age Security pension payout.
One way to achieve this goal is by leveraging the benefits of the Tax-Free Savings Account, or TFSA. Let’s see how.
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TFSA limit for 2024
As inflation remains elevated, there is a chance for the TFSA contribution room to increase to $7,000 in 2024, up from $6,500 in 2023. Generally, the TFSA contribution room is indexed to inflation, and the cumulative contribution limit has increased to $88,000 in 2023.
Retirees can earn passive income in a TFSA by investing in quality dividend stocks or in fixed-income instruments such as GICs (Guaranteed Investment Certificates). Any returns generated in this registered account are exempt from Canada Revenue Agency (CRA) taxes. So, you no longer have to worry if the income earned in a TFSA pushes you above the threshold for the OAS clawback.
Basically, you can avoid the clawback by making sure you maximize the TFSA contributions each year before holding income-generating investments in other taxable accounts.
What should TFSA investors buy right now?
The risk appetite for retirees is quite low, which means they are geared toward investments such as guaranteed income certificates. Due to recent interest rate hikes, Canadians can now earn more than 5% on GICs, which is quite attractive, especially if inflation rates cool down further.
But for investors with a larger risk appetite, investing in quality dividend stocks such as Brookfield Asset Management (TSX:BAM) is a better option. In addition to a tasty dividend payout, investors are also positioned to benefit from capital gains, both of which are sheltered from CRA taxes.
Moreover, the best dividend stocks increase payouts over time, enhancing your effective yield significantly.
Among the largest asset managers globally, Brookfield Asset Management is valued at $18 billion by market cap. Given its annual dividend of $1.75 per share, Brookfield Asset Management offers shareholders a tasty dividend yield of 3.8%.
Despite a challenging macro environment, Brookfield Asset Management has raised US$61 billion of capital in 2023 and US$26 billion in the third quarter (Q3). BAM also closed its sixth private equity strategy at US$12 billion, which is the largest ever to date.
In Q3 of 2023, Brookfield Asset Management reported distributable earnings of US$568 million, which rose to US$2.2 billion in the last 12 months, an increase of 8% year over year. The company ended Q3 with US$440 billion in fee-bearing capital, an increase of US$33 billion compared to the year-ago period.
Further, BAM deployed US$18 billion of capital into investments across several large-scale, high-quality businesses and assets.
Brookfield Asset Management announced a strategic partnership with Société Générale to originate and distribute private credit investments through a new investment-grade debt fund. According to BAM’s Q3 earnings release, “The initial fund is targeting a total of €10 billion and will launch with €2.5 billion of seed funding at inception from Brookfield Corporation and Société Générale.”
Priced at 22 times forward earnings, BAM stock is quite cheap and trades at a discount of 11% to consensus price target estimates.
